The Commissioner of Taxation has the benefit of an arsenal of enforcement tools available for the effective and efficient collection of corporate taxation liabilities. One such tool, which quickly focuses the minds of the directors of a corporate taxpayer, is a Director Penalty Notice (“DPN”) issued pursuant to s222AOE of the Income Tax Assessment Act (Cth) 1936 (“ITA Act”).

As the DPN regime has been in place for some years, its framework will be familiar to many.  However, the potential for a DPN to trigger significant personal liability on the part of company directors, and the increasing frequency with which DPNs are being issued by the Commissioner, underscores the critical importance for directors to re-familiarise themselves with the DPN regime and to promptly take steps to put in place adequate arrangements to ensure that a DPN is dealt with as quickly as possible. 

Reconsideration of DPN compliance is especially timely as the Government is currently considering a number of amendments to the DPN regime. These amendments are contained in the Tax Laws Amendment (Transfer of Provisions) Bill 2010, introduced to Parliament on 17 March 2010.  Whilst containing no policy changes, the proposed amendments are intended to streamline the DPN regime and the law under which it is administered by way of a number of small, but significant, alterations to the current law. These amendments are intended to commence operation on 1 July 2010.

The Current DPN Regime - A Recap

The current DPN regime imposes a duty on company directors to cause the company to remit to the Commissioner all withholding amounts (e.g., PAYG instalments[1]) payable to the Commissioner. 

Enforcement of that duty is effected by imposition of a penalty upon the director(s) of the company. That penalty is equal to any outstanding taxation amount payable by the company. When the company has paid the outstanding amount to the Commissioner, the penalty is reduced to zero.  Alternatively, should the company be unable to pay the outstanding amount, the penalty can be reduced to zero by way of the director(s) promptly acting to appoint an administrator or a liquidator to the company.  Should neither of these measures be undertaken, the Commissioner is able to take measures to enforce the penalty personally against the director(s).

Before doing so, the DPN regime requires that the director(s) of the company be given a “polite final reminder” of their duty to cause the company to remit withholding amounts to the Commissioner.  As such, before the Commissioner is entitled to enforce a penalty against the director(s), the Commissioner must serve the director(s) with a DPN that identifies the relevant outstanding taxation amount.

A recipient of a DPN has only 14 days from the date of posting[2] of the DPN within which to cause the company to undertake one of the following alternatives:

• pay the outstanding liability in full;
• enter into a payment arrangement with the Commissioner as prescribed under the ITA Act for payment of the whole of the outstanding liability (NB – should the payment arrangement be breached, a director may become personally liable for the unpaid balance in circumstances where a DPN has been issued);
• appoint an administrator to the company; or
• appoint a liquidator to the company.

Should the director(s) fail to comply with a DPN, by not causing the company to undertake one of the above four options within the 14 day period, the Commissioner is then entitled to enforce the penalty against the recipient director(s) personally.

Directors appointed after the due date for payment of outstanding tax liabilities may nevertheless become personally liable for those amounts under the DPN regime. It is recommended, therefore, that potential directors satisfy themselves that the company is up to date in respect of the relevant tax liabilities to ensure that they do not incur a potentially significant personal liability because of their accepting an appointment.

The Proposed Revamp

Given the potentially dramatic impact of a DPN on a director’s personal financial circumstances, the DPN regime has been the subject of much consideration by the Courts in instances when directors have sought to challenge, dispute or otherwise overturn the DPNs served upon to them. 

The proposed amendments to the DPN regime are designed to incorporate into the legislative framework many of the Court rulings that have resulted from such challenges, with a view to making the effect and operation of the DPN regime both clearer and more certain. 

A number of the proposed amendments deal with the structure of the legislation under which the DPN regime is enacted[3] However, the following are proposed amendments to the operation of the DPN regime itself of which companies and company directors should be aware:

• inclusion of an explicit prohibition barring the commencement of recovery proceedings by the Commissioner whilst a company is complying with a payment arrangement that has been entered into between the company and the Commissioner;
• clarification of the current requirements for service of a DPN, such that it is made clear that valid service of a DPN on a director is effected by the Commissioner merely posting the DPN to a recipient (as distinct from requiring proof of receipt or delivery of the DPN);
• extension of the time for compliance with a DPN from 14 to 21 days from the date of posting of the DPN;
• confirmation that, when serving a DPN on a director, the Commissioner is entitled to rely upon the address of that director as set out on the Australian Securities and Investments Commission register for the company, such that the Commissioner has no obligation to undertake any further enquiries as to the currency or accuracy of that address[4]; and
• amendment of the terms of a defence available to directors in respect of a DPN served upon them, such that if a director seeks to challenge a DPN on the basis of not having taken part in the management of a company (e.g., as a consequence of circumstances such as illness during the period in respect of which the DPN is issued), the director must also be able to show that it would have been unreasonable to expect the director to take part in the management of the company in light of those circumstances.

Conclusion

Along with Garnishee Notices, DPNs are one of the most powerful weapons in the Commissioner’s arsenal for the recovery and enforcement of taxation liabilities associated with corporate taxpayers.  They are a relatively inexpensive and straightforward tool for the Commissioner to utilise when a corporate taxpayer fails to comply with its obligations to remit withholding amounts to the Commissioner.

The proposed amendments to the DPN regime are intended to make DPNs an even more effective and efficient tool for the recovery and enforcement of taxation liabilities.  Consequently, particularly given the increasing volume and currency of information available to the Commissioner in relation to the amount and age of a corporate taxpayer’s liabilities, DPNs will likely continue to be an extremely powerful and preferred mechanism of the Commissioner in its enforcement framework.

It is strongly recommended that directors now, and on an ongoing basis, take adequate measures to ensure they have a clear picture of the financial circumstances of their company and in particular of the company’s position in relation to the timely payment of taxation liabilities.  Should unpaid tax liabilities exist, it is crucial that directors move proactively to ensure that such liabilities are addressed in an appropriate and considered fashion.  For directors who neglect to undertake such measures, the DPN regime imposes significant personal financial consequences.

O’Neill Partners has a high level of expertise in relation to the impact and effect of DPNs on directors and companies, and are well qualified to provide detailed and practical advice on the effect of DPNs and the compliance or defence options that may be available to directors and companies in the circumstances so as to obtain the best outcome.

This article has been prepared by Colin Brown, a member of our insolvency and litigation team, and we invite you to contact either Colin or our Chairman & Senior Partner, Michael O’Neill, for further information about the matters discussed.

The contents of this article are intended to provide only a general summary on matters of interest and are not comprehensive, nor does this article constitute legal advice.  You should seek legal or other professional advice before acting or relying on any of the content of this article.

© O’Neill Partners – Commercial Lawyers, 2010